This Monday, there was a meeting between the President of the United States, Joe Biden, and the Speaker of the House of Representatives, Kevin McCarthy, with the aim of reaching an agreement to raise the debt ceiling.

“I think the tone tonight was better than ever before. (…) I feel like it was productive,” the conservative said as he left the White House.

Still, McCarthy criticized that any Democrat proposal would involve an increase in government spending, and assured that the United States “has a spending problem.”

However, he argued that he will likely talk to Biden every day until the debt deadlock is resolved.

The Biden administration will try to reach a deal before they face a default. The Treasury Department estimates that this unprecedented situation could emerge as early as June 1 if Congress fails to reach a deal before then.

The current $31.4 trillion mark was reached last January. The government is currently drawing money from its reserves to pay off the debt it has taken on, but the Treasury Department estimates that those reserves will run out on June 1.

What happens if no deal is reached and the United States is unable to meet its debts?

“Any American who is directly or indirectly dependent on a government payment will stop being paid,” he told the AFP Gregory Daco, chief economist at EY Parthenon.

This includes the salaries and pensions of civil servants and soldiers, social benefits related to children, health care, low income or the elderly.

The Treasury is at risk of “running out of money to pay hundreds of billions of dollars in bills,” said Nancy Vanden Houten, an economist at Oxford Economics.

“Companies that work for the government don’t charge anything either,” adds Daco.

On the other hand, “if stock markets fall, (…) people’s savings and also their retirement savings would be affected,” Nathan Sheets, chief economist at Citigroup bank, told AFP.

“From a financial markets standpoint, there would be tremendous stress,” Daco said.

In 2011, as the United States was about to pay off its debt, the New York Stock Exchange crashed and the S&P 500 fell “about 13-14%,” he recalls.

What would make a big difference is if the United States can’t pay the Treasury bond holders; safe haven of global finance.

Will international investors stop investing, Daco wondered.

For now, “investors have become more cautious about holding government debt due in June,” Treasury Secretary Janet Yellen recently warned.

If US stocks collapse, “the situation would be catastrophic for all organizations that hold a lot of US Treasury bonds, such as banks, pension funds, insurance companies or mutual funds,” said Eric Dor, director of the IESEG school.

This would also entail the risk of bankruptcies and “domino effects with a new global financial crisis”. The dollar, meanwhile, would depreciate “very sharply,” he estimated.

The global financial system “depends on the stability of the dollar,” the Center for American Progress said on May 11.

As in 2011, gold could be the big winner. “It’s the safe haven” because in the event of a threat of default, “the dollar will fall, bond yields will fall and equities will fall,” Cresset Capital’s Jack Ablin warned AFP.

American economy

For the United States, “the economic impact is simply that the government will stop spending,” said Gregory Daco. This will affect household consumption, the lung of the US economy.

Lower government spending means “that the family that doesn’t receive their check (…) can’t spend the same when they go shopping, which (…) affects the store they shop at, which, in turn, will later have their own influence hiring decisions,” emphasizes Daco.

Moreover, since the government can no longer pay its suppliers, “the companies of which the State is a customer (…) threatened to go bankrupt”, adds Eric Dor.

The cumulative financial and economic impact would cost the US economy 5% of GDP, says Gregory Daco. “We are talking about a bigger shock than the contraction of GDP during the financial crisis. We are talking about a huge impact,” he warned.

global influence

The effects would also be global in scope.

The rates of “bonds issued by the United States would rise sharply” and would unleash chain reactions, including “a decline in corporate and household investment, as well as consumption, and thus a strong recession in the United States”, which could spread “ to Europe and other places”, Eric Dor anticipates.

“I don’t think growth in the world or in the US will be significantly affected this year,” he added.

Paradoxically, the situation could benefit U.S. exporters, as a dollar depreciation would “increase foreign demand by actually making products cheaper,” according to a May 2 Council on Foreign Relations note.